Has Apple Inc. met its match in Canada’s banks?
Domestic power wielded by Big Six allows them to cut their own deals
Merrill Lynch has carved out a slice of the Canadian banking landscape — twice — in the past 30 years. But, both times, the powerhouse U.S. financial services firm retreated, selling its operations to one of Canada’s six dominant banks.
The Merrill experience paints a vibrant illustration of the market power wielded in Canada by the Big Six. More recently, four of them including Canadian Imperial Bank of Commerce, which bought Merrill Lynch Canada’s operations (which had $50 billion in assets under management) when the U.S. behemoth pulled up stakes in 2001, demonstrated their power to band together with other national financial giants to defeat an attempt by the London Stock Exchange to buy the parent company of the Toronto Stock Exchange. A consortium backed by the banks ultimately bought the Canadian exchange group for itself.
That power, a blend of enviable market share and a status approaching that of national institutions, is something Cupertino, Calif.-based Apple Inc. would be wise to keep in mind as negotiations ramp up with Canada’s banks over the Canadian implementation of its smartphone payment technology, Apple Pay.
The big banks and the tech giant are on a “collision course” as they work toward giving customers a coveted cashless and cordless “mobile wallet,” Royal Bank of Canada chief executive Dave McKay told investors at a conference last month in New York. But while the banks operate in a market a tenth the size of Apple’s home turf, they have used their domestic scale and market share clout to punch above their weight in the past, prevailing against large, brand-name foes.
“Canada is a bit (of a) different dynamic than in the U.S. — given the oligopoly in Canada,” says John Aiken, a financial services analyst at Barclays Capital.
Thousands of banks dot the United States in a fragmented system of regional banks such as Pacific Western Bank and First Tennessee Bank that loan money and take deposits alongside behemoths like Bank of America and Citibank.
To be sure, Apple has a powerful bargaining chip wherever it goes with its sweeping global brand power and embrace of products like the iPhone and just-released Apple Watch. CIBC and Bank of Nova Scotia jumped aboard Thursday to ensure their mobile banking apps are available to wearers of the new watch.
But rather than fall in line with established deals struck south of the border, the domestic power wielded by the small group of big Canadian banks has enabled them to cut their own deals in negotiations with large multinational players in the payments sector, according to Bob Waite, a former senior communications executive with Canadian Imperial Bank of Commerce.
“Given their size and scale, Canadian banks have reputedly been able (to) obtain better terms from card issuers such as VISA and MasterCard as compared to their U.S. counterparts,” says Waite, who now runs an executive communications consultancy with banking clients in both Canada and the United States.
“CIBC had significant leverage with VISA, given (the bank’s large) market share,” Waite said, adding that Canada’s fifth-largest bank remains a “major player” despite the sale of part of its Aerogold portfolio to Toronto-Dominion Bank last year.
Canadian banks also managed to keep VISA and MasterCard out of the debit business in Canada by setting up a proprietary network in 1984 called Interac, which still handles all payment transfers between Canadian financial institutions today.
Interac is also credited with keeping Canada ahead of the curve with secure payments at retailers through chip and PIN technology.
Waite, who earlier in his career served as press secretary to U.S. senators Edward W. Brooke and Bob Dole, said another factor in favour of Canada’s banks is that their domestic operations are outside the fray of U.S. politics and the impact that could have on banks and the evolution of mobile payments in that country.
As large employers in states such as California, tech companies like Google Inc. and Apple — already “heavy hitters politically in the U.S.” — have growing political clout, he said. This could work in their favour if they forge alliances with consumer-friendly politicians inclined to push for anything that leads to competition with the big banks.
Waite said this clout cannot be exercised in the same manner in Canada, a reality that will make the path rockier for firms like Apple and Google as they try to enter the payments business and take on established domestic financial players.
“They really don’t have that kind of leverage in Canada. So it is conceivable that Apple Pay will face greater restrictions in Canada or a more limited scope of operation,” he said.
Some Canadian banks, such as Royal Bank of Canada, have begun to develop their own “mobile wallet” technology that will enable customers to use their mobile phones to quickly and efficiently make secure payments as if they were using a credit or debit card. The push dovetails nicely with the commitment of some of the Canadian banks to pursue profit growth by boosting their credit card portfolios.
But there is no denying the draw of the Apple brand, despite some glitches in the initial rollout of Apple Pay in the United States late last year.
The payment technology is now accepted in 700,000 locations with 2,500 banks and credit unions in the U.S. making the service available to customers. Apple chief executive Tim Cook has been quoted saying Apple Pay quickly ramped up to account for $2 of every $3 spent in stores with a contactless payment.
Tara Hendela, manager of public relations for Apple in Toronto, says when Apple releases anything, from the latest smartphone to the Apple Watch, Canadians want it and have traditionally been in either the first or second wave of country launches.
She declined to comment on negotiations with Canadian banks, but said the tech company has been clear that it plans to expand the Apple Pay network beyond the U.S. border.
For banks like RBC, creating their own mobile wallet would reduce the amount of revenue lost to new tech partners such as Apple inserted into transactions. It would also retain a crucial connection to customers, as explained by McKay at the RBC conference in New York in March.
But analysts say proprietary payment systems created by the Canadian banks could lead to a fragmented jumble of options that would alienate bank customers — particularly since Apple is intent on running payments through its own system, thereby retaining much of the profitability.
“Theoretically, if RBC runs only with its proprietary technology, it is blocking out its clients that use Apple products,” says Aiken, the Barclays analyst. The upshot could be a choice forced upon some customers to change banks or change phones.”
As a result, he said he would “not be surprised” to see Apple Pay rolled out by Royal Bank, TD, and Bank of Montreal, the three Canadian banks that already offer the payment option on their U.S. platforms.
Beyond the daunting task of taking on the Apples and Googles of the world at their own game, there is a view Canada’s embrace of technology could put the banks at a disadvantage with the tech firms in terms of customer demand.
“I understand that Apple has a higher share of the smartphone market in Canada than it does in some other jurisdictions, which could give them a bit more negotiating leverage” in this market, says Peter Routledge, an analyst at National Bank Financial.
It is conceivable that Apple Pay will face greater restrictions in Canada or a more limited scope of operation.